Transaction Laundering – a Growing Threat in the Payments Industry
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WHITE PAPER TRANSACTION LAUNDERING – A GROWING THREAT IN THE PAYMENTS INDUSTRY Abstract Nientibus et harum la aliquos que dunt harunte nat qui assimin ctincti nimoloratur? Quis sin enim expello rescitis aliberiosam, sumendu cienimil es ab in pelibus antiunt, eatur sit volorec tetur, occus asi suntiss imporer eperis dolupta que quid quatis mo volorit quas maio. Im acest, eos si beat. Ur? Nonseque reribus. Itatium re, nissi nullupietur audis sit adis con non corrum fugias eosae nones nonsenimus Itate esto moluptatur autatis sinctota dolent labo. Sum autem reriossum eos acerestectur rem que et haribus vel etur What is transaction laundering? Transaction laundering is an activity through which entities, unknown to a merchant acquirer, process their payments through the facilities provided by the acquirer to a known merchant. It is a criminal activity which violates the agreement that the merchant had with its acquirer. The method of using legitimate websites as a front is being used by criminals to conduct illegal activities, such as sale of counterfeit products, drugs and weapons trade, illegal pharmaceuticals, illicit pornography, unlicensed gambling, money laundering, and terrorism financing. It creates a situation where Merchant Service Providers (MSP – a collection of banks, acquirers, and payment processors) unknowingly become party to illegal activities and facilitate money laundering. This not only damages their reputation, but also makes them vulnerable to excessive chargebacks, legal actions, and regulatory penalties. Transaction laundering is sometimes referred to as ‘unauthorized aggregation’ or ‘undisclosed aggregation’ or ‘factoring’. This is because of the way illegal payments from one or more unknown sites are aggregated to be processed through a single legal merchant account. However, “aggregation” is a legitimate payments model using which small and medium businesses rely upon payment aggregators to take credit and debit card payments from their customers. Thus the term ‘transaction laundering’ became popular which indicates that the payment transaction itself is altered to launder money. The ultimate penalty is borne by the acquiring bank of a merchant indulging in transaction laundering, either knowingly or unknowingly. Regulations require the MSP to verify the legal identity of their customers and identify the Ultimate Beneficial Owner (UBO) of that entity. However, traditional Know Your Customer (KYC) still focuses on physical aspects of the legal entity as opposed to the digital aspects, making the payments area extremely vulnerable to transaction laundering. External Document © 2018 Infosys Limited How big is this threat? which about three percent are involved in in Paris in 2015 was aided by transaction illegal activities. laundering. According to EverCompliant, which is a According to a research by pymnts.com, solution provider in this space, US$155 G2, another solution provider who has been monitoring merchant content for more than 25 percent of terminated billion was generated from online sales the last 11 years, has found out that an accounts come back into the payment via transaction laundering in 2016 in average of 1.5 percent of a client’s portfolio system in a disguised manner with nearly no the USA alone. In addition, banks are contains illegal or unknown websites. change in their operations. About 50 percent processing about six percent to ten percent of websites involved in unlawful activities do of unauthorized e-commerce sites, out of In fact, the Charlie Hebdo terrorist attack not register for merchant accounts. Why is transaction laundering difficult to detect? Although this method of money laundering may seem simple, it is not very easy to detect through traditional means due to the following reasons: 1. Complexity of the payments chain: There can be several combinations of a payment cycle involving the shopping cart, payment gateway, payment processor, and bank where the payment may go through multiple gateways or payment processors. Hence, it is very difficult to differentiate legitimate transactions from the illegitimate ones 2. Inability to safeguard websites: Some merchants may not realize that their websites are being used for illegal transactions either through their affiliate programs or simply by using their website as a shadow site 3. Numerous unreported websites: Transaction violations maybe done through hidden websites that the bank may not know and therefore may not monitor. Traditional monitoring methods do not catch unreported websites 4. Growing use of corporate credit cards in business to business (B2B) payments: It has seen a growth of 25 percent till 2016 and is expected to grow at least at a rate of 10 percent y-o-y till 2018. Some of these corporate credit cards offer attractive cash backs making it a more preferred option over Automated Clearing House (ACH). Therefore, it is now common to have a large payment (running into thousands of dollars) being done via a single transaction, making it difficult to single out malicious transactions. External Document © 2018 Infosys Limited Why it has become an increased threat in recent years? In recent times, the threat of transaction e-merchants and payment facilitators 2. Factors that do not deter enough: laundering has increased due to two which provide a good degree of a. Fraudsters are finding it difficult to launder primary reasons – i) rapid increase in anonymity money through traditional means (cash, mechanisms that aid in this activity, and c. Banks have outsourced the high-cost wires, ACH) given the sophisticated and ii) the checks to detect them are unable to customer and merchant acquisition mature monitoring systems that exist keep pace. to payment service providers and for such payment methods. However for credit cards, the focus has typically been 1. Factors that aid transaction facilitators, who do not have the same degree of risk management and on frauds as opposed to money laundering laundering: monitoring capabilities b. Current regulations are attuned largely to a. Creating a professional-looking d. There has been a sudden surge in lines of business such as banking, capital website to sell goods along with alternate payment methods, such as markets, and insurance or products such as a checkout page and credit card digital wallets, payment processors, wires, cash deposits, and securities trading. profile has become very easy and payment gateways, which do not Payments and ‘card not present’ credit enabling criminals to create an online have a very good monitoring solution, card transactions are the blind spots in the marketplace swiftly. Criminals do not giving a fraudster newer avenues to world of anti-money laundering (AML) have to create actual brick-and-mortar launder money c. Merchant acquirers are not governed by storefronts to launder money. Thus, e. It has become an attractive avenue to the same level of Bank Secrecy Act (BSA) all three steps of money laundering – generate additional revenue, either / AML requirements as those of banks. placement, layering, and integration through abuse of affiliate programs or They focus on monitoring transactions can be done digitally by being complicit to the crime along for chargebacks only, instead of money b. There has been a substantial growth in with a launderer laundering External Document © 2018 Infosys Limited What are the types of transaction laundering? Transaction laundering can be done in various ways and its typical growth trend is given in Exhibit 1. Scope of traditional monitoring systems 4 Combination of traditional laundering and complicit merchants Illicit money gets legally transferred to criminal’s account 1 Malicious competitor either within or outside country Framing: Harvest merchant Have legitimate cash- credentials and use that to Payment Service Encash money from Acquiring Bank intensive merchant buy perform malicious operations Provider prepaid card into fictitious product from criminal’s account via ACH complicit online merchant Disclosed aggregation merchant Transaction laundering (Online) Funnel Account: Illegal business related credit card Collude with legitimate Buy prepaid card from Smurfing charges funneled as legitimate cash-intensive firms legitimate merchant Laundering without without the Laundering knowledge merchant’s Traditional (In-person) Registered Affiliate Merchant-based money laundering Sell drugs/illegal items for Affiliate Fraud: Use harvested cash or via earlier methods credit card credentials to make Registered Merchant purchases and earn “points” Traditional & Transaction laundering (In-person & Online) Non-registered Criminal owned merchants registered merchant Pass-through: Forcibly embed Front business (direct): merchant payment link in Directly selling illegal item in illegal website disguise via registered site 2 3 Criminal owned Owning the merchant business and Laundering with the Undisclosed Undisclosed merchant using it as a “front” merchant’s knowledge aggregation merchant Corrupt merchant: Partner with Front business (indirect): Several other functionally and visually corrupt merchants who allow use Unauthorized website selling similar websites were created with of their payment accounts for illegal items using registered different acquiring banks and PSPs illegal sales, for a fee merchant account Exhibit 1: The evolution of transaction laundering External Document © 2018 Infosys Limited 1. Merchant is unaware 2. Merchant is aware and i. Front business (direct): This is where complicit the ‘front’